House prices are likely to fall harder in Sydney and Melbourne between now and next year if the higher-than-expected inflation numbers prompt the Reserve Bank to start raising the official cashrate as early as next week, experts say.
The risk of a sharper decline in house prices outside the country’s two biggest markets will also increase and could trigger a downturn even in those capitals where home values are still rising.
Shane Oliver, AMP Capital chief economist, said the Reserve Bank could raise the official cash rate when it meets next week after the inflation rate jumped by 2.1 per cent in the March quarter and by 5.1 per cent over the year – the sharpest quarterly and annual gains since 2000.
“The latest inflation blowout adds significant pressure on the RBA to immediately start raising rates and to do so more aggressively than initially thought likely,” he said.
“The inflation numbers are too big to ignore, so we now expect the RBA to start hiking at its May meeting next week and by 0.40 per cent, which will take the cash rate to 0.50 per cent.
“The RBA probably doesn’t want to wait until after the election, and until after they get the wages data on May 18. With the inflation coming in well ahead of their own expectations, let alone economists’ expectations, I think there’s a very strong case for them to start raising next week.”
The risk of bigger falls in housing values was greater at this time due to higher household debt levels, said Dr Oliver.
“The boost to the property market from lower rates has also been higher than it has been in the past, so the reversal of those lower rates, presumably, has a bigger negative impact,” he said.
“And it might come earlier than normal because, traditionally, prices don’t start weakening until six or 12 months after the first interest rate hike.”
AMP is forecasting prices to fall by about 10 per cent between now and the end of next year as a result of the earlier and sharper rate increases.
Even before a rise in the official cash rate, a lift in average fixed rates, affordability constraints and higher levels of supply have started to put downward pressure on property prices, which have already started to slip across Sydney and Melbourne, said Eliza Owen, CoreLogic’s head of research.
“It seems reasonable that new demand for mortgages will decline against a lift in the cash rate, putting downward pressure on property prices,” she said.
“A rate hike may trigger an earlier-than-expected decline in prices outside of Sydney and Melbourne, which can be a trigger for other capital city markets to eventually follow.”
House prices have dropped in Melbourne and Canberra during the first quarter, while Sydney has flattened, as the surge in stock and growing unease about poor affordability and looming rate increases weigh on demand, data from Domain shows.
Melbourne’s median house price fell by 0.7 per cent, the first quarterly decline since the June quarter of 2020, while unit prices tumbled by 2.2 per cent – the steepest quarterly decline in five years.
Dwelling prices slumped in all Melbourne regions except houses in the inner-east and units on the Mornington Peninsula.
House prices in Canberra fell by 0.9 per cent over the quarter, the first three-month decline in two years and ending the steepest upswing in Canberra’s house price history.
In Sydney, the median house price rose by just 0.2 per cent, a sharp slowdown from the 6 per cent growth recorded in the previous quarter, and the weakest since the June quarter of 2020.
Sydney’s premium markets led the decline, with house prices slumping by 6.5 per cent in the first three months. The eastern suburbs, Ryde and the northern beaches, posted price declines of 5.4 per cent, 4.9 per cent and 0.5 per cent respectively.
“Flattened house prices and declining unit prices has made Sydney’s price growth rate one of the most significant slowdowns of all the capital cities, and indicates that the steepest upswing on record has ended,” said Nicola Powell, Domain’s chief of research and economics.
By contrast, Brisbane, Adelaide, Perth, Hobart and Darwin posted strong quarterly growth of 3.1 per cent, 3 per cent, 1.5 per cent, 4.3 per cent and 1.8 per cent respectively.
Across the combined capitals, median house prices rose by 0.6 per cent, a sharp drop from 6.3 per cent in the December quarter.
This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/house-prices-are-at-risk-of-sharper-falls-20220427-p5agdt